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Fair Value Accounting | 9 Months Ended
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Sep. 30, 2018
Fair Value Accounting [Abstract] |
Fair Value Accounting | NOTE 7 – Fair Value Accounting FASB ASC 820, “Fair Value Measurement and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 – Quoted market price in active markets Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include certain debt and equity securities that are traded in an active exchange market. Level 2 – Significant other observable inputs Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include fixed income securities and mortgage-backed securities that are held in the Company’s available-for-sale portfolio and valued by a third-party pricing service, as well as certain impaired loans. Level 3 – Significant unobservable inputs Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. These methodologies may result in a significant portion of the fair value being derived from unobservable data. The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 13 of the Company’s 2017 Form 10-K, except for the valuation of loans held for investment which was impacted by the adoption of ASU 2016-01. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of September 30, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach, using the eight categories as disclosed in Note 4 – Loans and Allowance for Loan Losses. Loans are considered a Level 2 and Level 3 classification. Assets and Liabilities Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.
|  | September 30, 2018
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |
US government agencies |  | $ | - |  | 8,634 |  | - |  | 8,634
SBA securities |  |  | - |  | 3,472 |  | - |  | 3,472
State and political subdivisions |  |  | - |  | 8,372 |  | - |  | 8,372
Asset-backed securities |  |  | - |  | 6,586 |  | - |  | 6,586
Mortgage-backed securities |  |  | - |  | 39,822 |  | - |  | 39,822
Mortgage loans held for sale |  |  | - |  | 9,298 |  | - |  | 9,298
Interest rate lock commitments |  |  | - |  | 189 |  | - |  | 189
MBS forward sales commitments |  |  | - |  | 54 |  | - |  | 54
Total assets measured at fair value on a recurring basis |  | $ | - |  | 76,427 |  | - |  | 76,427
|  | December 31, 2017
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |  |
US government agencies |  | $ | - |  | 8,653 |  | - |  | 8,653
SBA securities |  |  | - |  | 4,063 |  | - |  | 4,063
State and political subdivisions |  |  | - |  | 11,396 |  | - |  | 11,396
Mortgage-backed securities |  |  | - |  | 43,491 |  | - |  | 43,491
Mortgage loans held for sale |  |  | - |  | 11,790 |  | - |  | 11,790
Interest rate lock commitments |  |  | - |  | 196 |  | - |  | 196
Total assets measured at fair value on a recurring basis |  | $ | - |  | 79,589 |  | - |  | 79,589
Liabilities |  |  |  |  |  |  |  |  |
MBS forward sales commitments |  | $ | - |  | 28 |  | - |  | 28
Total liabilities measured at fair value on a recurring basis |  | $ | - |  | 28 |  | - |  | 28
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017.
|  | As of September 30, 2018
(dollars in thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | - |  | 1,391 |  | 8,339 |  | 9,730
Other real estate owned |  |  | - |  | 23 |  | 94 |  | 117
Total assets measured at fair value on a nonrecurring basis |  | $ | - |  | 1,414 |  | 8,433 |  | 9,847
|  | As of December 31, 2017
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | - |  | 2,685 |  | 6,084 |  | 8,769
Other real estate owned |  |  | - |  | 148 |  | 94 |  | 242
Total assets measured at fair value on a nonrecurring basis |  | $ | - |  | 2,833 |  | 6,178 |  | 9,011
The Company had no liabilities carried at fair value or measured at fair value on a nonrecurring basis. Impaired Loans The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, “Receivables.” The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with FASB ASC 820, “Fair Value Measurement and Disclosures,” impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2. The Company’s current loan and appraisal policies require the Company to obtain updated appraisals on an “as is” basis at renewal, or in the case of an impaired loan, on an annual basis, either through a new external appraisal or an appraisal evaluation. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 7% - 10% of the appraised value. For non-real estate loans, fair value of the impaired loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3. The fair value of impaired loans may also be estimated using the present value of expected future cash flows to be realized on the loan, which is also considered a Level 3 valuation. These fair value estimates are subject to fluctuations in assumptions about the amount and timing of expected cash flows as well as the choice of discount rate used in the present value calculation. Other Real Estate Owned (“OREO”) OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of real estate owned activity. The unobservable inputs may vary depending on the individual assets and valuation approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 7% to 10% of the appraised value. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the OREO as nonrecurring Level 3. Fair Value of Financial Instruments Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities. The estimated fair values of the Company’s financial instruments at September 30, 2018 and December 31, 2017 are as follows:
|  | September 30, 2018
|  | Carrying |  | Fair |  |  |  |  |  |
(dollars in thousands) |  | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Other investments, at cost |  | $ | 4,929 |  | 4,929 |  | - |  | - |  | 4,929
Loans1 |  |  | 1,591,396 |  | 1,569,385 |  | - |  | - |  | 1,569,385
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,589,483 |  | 1,445,228 |  | - |  | 1,445,228 |  | -
FHLB and other borrowings |  |  | 68,500 |  | 68,548 |  | - |  | 68,548 |  | -
Junior subordinated debentures |  |  | 13,403 |  | 14,293 |  | - |  | 14,293 |  | -
|  | December 31, 2017
|  | Carrying |  | Fair |  |  |  |  |  |
|  | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Other investments, at cost |  | $ | 4,462 |  | 4,462 |  | - |  | - |  | 4,462
Loans1 |  |  | 1,359,101 |  | 1,363,915 |  | - |  | - |  | 1,363,915
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 1,381,123 |  | 1,269,462 |  | - |  | 1,269,462 |  | -
FHLB and other borrowings |  |  | 67,200 |  | 67,890 |  | - |  | 67,890 |  | -
Junior subordinated debentures |  |  | 13,403 |  | 13,166 |  | - |  | 13,166 |  | -

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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